Chrysler capital has been one of the best investor n more importantly exits at right time.numerous example like Suzlon,Bharti,Shriram group are there .so their exiting BkT is a very important event.Why have they exited at this juncture fully.

That is something which concerns me as well. But on the other hand, it is good that part of the offloaded stake has been picked up by the four largest mutual fund houses in India - Reliance, SBI, ICICI and Franklin.

1). As rubber prices have corrected in the last few months, is the company planning to cut prices of their products? Whatâs the expected EBITDA margin going forward?

2). Is the company witnessing any slowdown in sales both abroad and India?

3). How much is the sales expected to be increased during the next few years and what will drive the growth (new markets, growth in existing markets, pricing power). How much has the market been growing as a whole?

4). How is the expansion going and when is the plant expected to be ready

5). Alliance tire Group (ATG) is also undertaking a $160mn expansion; how would this impact the overall market and wouldnât this put pressure on companyâs margins?

Heard on the Street: Balkrishna Industries rises as top fund houses buy stock

Jul 5, 2012, 06.41AM IST

Leading fund houses have been accumulating shares of tyres and rubber product manufacturerBalkrishna Industrieson the back of declining raw material prices. Six leading fund houses have been buying shares of the company at every opportunity over the past two days market sources said.

According to analysts, the company is likely to post good earnings, thanks to declining rubber prices. Slowing global demand and the ongoing crisis in Europe have impacted rubber pricesin a big way. RT1, the benchmark for international rubber prices, has fallen by over 20% over the past six months.

Lower rubber prices benefit tyre companies in a big way as it accounts for a major part of the operating expense. Shares of Balkrishna Industries ended 5.1% higher at Rs 271.9 on theBSEon Wednesday.

The PE firm has pocketed modest returns on its seven-year-old investment, as per VCCircle estimates.

Private equity firm ChrysCapital has sold off most of its 9.59 per cent stake in the public-listed Balkrishna Industries Ltd, selling over nine million shares in the largest Indian manufacturer of off-highway tyres (OHT) for Rs 217 crore...

IIFL said, â We expect raw material expenses, primarily of natural rubber, to be largely stable and expect volume growth to improve from 2HFY12 following commencement of production fromthenew capacity."

The company has reported 47% jump in the Net Profit at Rs 76.27 crore over 39% increase in the total income from operations at Rs 788.55 crore for the quarter ended March 12. Tonnage sales grew 19% growth to 36358 MT.

For the year, the company has posted 48% increase in the net sales at Rs 2794.82 crore; thanks to 19% increase in volumes at 133040 MT. Strong growth in the revenues has led to 45% increase in the Net Profit at Rs 268.52 crore. The company has mitigated sharp rise in the NR prices in the year and reported strong profit. Growth has come across all geographies in Europe, USA, and Asia etc.

However, in light of ongoing European debt crisis, the management noted that they have witnessed demand slow down in the European markets during the first two months of FY13. The share of revenues from Europe is expected to correct from 46% in FY12 to 43% in FY13. This gap is covered by healthy demand growth in American replacement market.

Average Rubber prices for the quarter were USD 3500 per MT. Expecting further fall in the NR prices, the company has tied up for 2-3 months production by way of forward contracts on an average of USD 3300 per MT. The company imports its all raw material products. Even considering depreciation of rupee at 56 levels against USD, the imported NR is cheaper by Rs 12-15 per Kg. Since the company exports its finished products, it enjoys nil duty imports. The company exports its tyres under Advance license scheme (with benefits of 5-6% of sales).

The company doesn't hedge its export book to USA as it has natural hedge by importing the raw materials. However, it has hedged European orders at around Rs 70 per Euro for the next 12 months.

The company plans to increase current capacity by 12000 MT through debottlenecking, there by taking the total capacity to 1,56,000 MTPA. Green field Bhuj Green field capacity is running as per schedule and is expected to commence operations by end of September 12. However, full capacity utilization from this plant will be in FY15. While first tranche of USD 175 million of the total capex (USD 275 million) was drawn (at libor + 265 bps) already, the company has tied up for the remaining portion of USD 100 million (at libor + 320 bps). The company can gain 1-2.5% improvement in margins post Bhuj expansion on the back of logistics cost and fuel cost. The share of Agriculture and OTR tyres was 64% and 33% for FY12. Post full commissioning of Bhuj plant, the mix would become equal.

The company is maintaining 20% price differential from the leading players in Europe and USA markets. There is no scope for the downward revision of prices in current situation.

The company has spent capex of Rs 623 crore for FY12. It expects to spend Rs 750 crore towards Bhuj capacity and Rs 30 crore for debottlenecking and Rs 30 crore as regular maintenance, totaling to around Rs 800-810 crore in FY13. Total achievable capacity post Bhuj expansion is 276000 MTPA. Debottlenecking process is expected to be completed by end of Q3FY13.

The order book of the company at end of March 12 stands at Rs 64000 MT equivalent to order visibility for 5 months of volume sales.

Capital work in progress at end of FY12 stood at Rs 450 crore on standalone terms.

As you might have noticed from its recent (and long-standing track record) that it manages the challenges in its environment very very smoothly. RM Going up or down, and Currency fluctuations up or down.

Rubber - there is a glut (2004-5 plantations coming off age in 2012 season. So prices are on a downtrend. Company has reduced inventory to 2 months from 5 months

Forex - RM import and US$ Sales (US & RoW) neutralise each other. Euro sales realisation was on an average Rs 62-63 basis in FY12, and this year its like Rs 70 basis. They are hedged simple 1 year forward on a rolling basis on the Euro. So whether rupee goes up or down, BKT is unaffected.

Bhuj Plant - execution on track

We are at a loss - to crack open any weakness - where can BKT falter??

Govind rubber has a very high Debt level. Majority of the Operating Profit goes into interest payment. Now they are planing to do 850cr (750cr for Dahej plant, and 100 cr for modernization). Seems to me a case of debt funded growth, which can fizzle out very quickly with worsening of any factor which can effect its operating profit.

6). Other Exp - variable in nature; increases in proportion tovariation in Sales. Exchange loss of 17 Cr on Sales & purchase transactions- thats more like a one-time hit; rest are variable in nature

7). Rm - prices on declining trend. No posssibility of priceincrease.

8). Eu situation vs Capex expansion - we will go ahead. confident to maintainguidance. Current situation - is going on for almost 4years.There may be impact on order flow...but our focus onreplace markets impact will be minimal

10). OEm seg effected first in a recession situation. Peoplecontinue to operate the existing equipment - for which theyneed to keep buying replacement tyres.

11). mining & Construction - bullish - by Titan & others.

SKUs fro MIning mostly ready. Chopanki & Waluj plant we have smallcapacity OTR ...we are just enhancing thisOut of total 30-35% is OTR. Mining will be around 9-10% . withnew plant OTR share will go to 45%

2). Q2 Results should be better - primarily because of lower RM; and Forex loss on Sales/Purchase transactions may not be there (can be considered one-off in nature - actual sale/forward coming due in the quarter vs SPOT purchase during the Qr). Someone knowledgable on this can dissect this better?

4). Expansion on Schedule. Production at Bhuj to start in Sep. expect 25000 MT for half year. Sales guidance FY13 160000-165000 MT intact. EBITDA can be 20% as indicated by Management. PAT will be more like 9%

I don't see much to worry about. BKT is in a sweet spot. Let me get down to capturing back the Management Q&A we did last month - so all of you can appreciate just how sweet a spot that is:)

I read through the thread and found it very informative. As I understood, the key determinant for BKT value (and continued performance) is the price differential it enjoys as compared to the other players (specially the international ones), something that's stated to be in the range of 25% or so today.

But I could not really find an analysis on the drivers of this price advantage, outside the 7% or so difference in the employee cost. Has there been any discussion on where does the balance 18% or so come from, and its continuity?

But I could not really find an analysis on the drivers of this price advantage, outside the 7% or so difference in the employee cost. Has there been any discussion on where does the balance 18% or so come from, and its continuity?

Hi Amit,

Thanks for your perceptive queries.

Yes this aspect has not been analysed much. Its difficult to put a finger on it! But there are enough clues if you have followed the detailed questioning in the MAnagement Q&As.

What I have understood that the real differentiator is in the manufacturing process that BKT has refined over the years. Maintaining a low-volume, large variety 2000-3000+ SKUs product range requires a very different kind of factory, with different man ufacturing than in large volume commercial tyre manufacturing.

BKT has refined this over the years and has got better at it. Some of the biggies have exited this market altogether. Only Alliance can pose a serious challenge to the sustainability- they have the knowhow but they can only reach where BKT has in 5 years. This is as BKT maintains a manufacturing challenge, there are no shortcuts, ramping up beyond 30000 MT a year is very very difficult. one has to go at iot in the sloiw steady way.

Besides the market is huge. at $13-14 Bn annually , growing at 4%-5%, BKT has only a 5% market share. It will easily go to a 10% market share in next 5 years, growing at the rate it is. There is no one coming close in terms of capacities - with the advantages that BKT has. So it will keep taking away market share from the biggies for the next 5 years - without really troubling any of the biggies either.

As usual, we came away very impressed. It seems the Management is on top of most of the challenges and poised to harness the opportunities in front of it.

This looks like a good candidate even for fresh allocations, at current levels.

Please go through the Q&A carefully. Why is an investment into Balkrishna Industries NOT a no-brainer? The only RISK is a sudden demand-crash (given the continuous capacity build-up). We have tried to quiz this aspect extensively from the management, and I for one could not pick holes in the Management's defense. They are very very confident of the 160000-165000 MTPA Sales guidance for the year. Q1 results have confirmed that confidence. Q2 will need watching.

My sense is, it will keep growing at 30% plus levels for the next 2-3 years. From current 5% market share, it may easily go to a 10% market share in next 5 years, my conservative projections indicate.

Like the natural skeptics to have a go. I can find no holes:).

1). The Euro region slowdown is a smoke-screen, it has not affected the replacement market, which is BKT's business model.

2). The Agri segment constitutes 63% of BKT Sales - has always been evergreen, it is recession-proof. Farmers may not buy enough new equipment for sure, but they will continue to operate existing equipment - which if needs replacement tyres - they will buy.

But then I am an Optimist always, and am probably biased on this story. But I sure like to bet where the odds lie. In this case the odds seem to be stacked very much in favour of BKT.FY13 growth is very much protected??

Like to know why NOT? Strong Views Invited . Let's spar on this and dissect this one RISK threadbare.